Episode 2
Host: Matt Hall
Guest: Jared Kizer
00:00:06 MH Welcome to Take the Long View with Matt Hall. This is a podcast to help reframe the way you think about your money, emotions, behavior and time. The goal: Helping you live richly. We'll talk with the best thought leaders we know to learn from their meaningful experiences. We'll bury the vegetables of world-class thinking in stories and conversation. Helping you reframe your prospective so that, you too, can put the odds of long-term success on your side.
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00:00:41 MH Today I am so excited to be joined by former colleague and gigantic brain friend, Jared Kizer. Mr. Kizer, you see I’m showing you respect, Jared, is Chief Investment Officer for Buckingham Strategic Wealth and the BAM Alliance. These two firms are massively successful independent investment firms. One works with clients and the other serves advisors. Collectively, they have in the neighborhood of $50 billion under management or advisement and it’s where I started my own career and crossed paths with Jared. Jared devours numbers, research and can hang with the most technical folks in our investment industry. He’s also a small-town Tennessee kid with a heart for helping others better understand the complicated money concepts that will have a tangible effect on their financial lives.
00:01:30 MH Jared shares his firms’ investment policy committee, which evaluates findings from academic research and applies that learning to develop its investment strategy recommendations. Jared is also an author in 2008. Jared co-authored the book, The Only Guide to Alternative Investments You’ll Ever Need with financial author and mentor, I think in some ways to both of us, Larry Swedroe. Jared has written several articles on topics including retirement planning and investment policy and his work has been published in the Journal of Portfolio Management, the Journal of Indexes and IndexUniverse.com, AdviceIQ.com, Morningstar, and USA Today. He maintains a blog at MultifactorWorld.com. And Jared has also made appearances on local and national television, including Bloomberg. Jared is a Chartered Financial Analyst, or CFA, and holds a master’s degree in finance from Washington University in St. Louis.
00:02:23 MH Wow! Welcome, my friend! I am so grateful you’re taking time to share your thinking with us!
00:02:23 JK It’s great to be here man!
00:02:30 MH Have you ever had someone talk for so long about you?
00:02:34 JK I think that may well be the longest.
00:02:36 MH Okay.
00:02:36 JK For sure.
00:02:37 MH Well you do have a gigantic brain and I am… I always think to myself, if we can marry my strengths and your strengths, you’d have a pretty awesome human.
00:02:46 JK That should, that would be nice. That would be very, very nice.
00:02:50 MH You are a deeply technical thinker and, yet, I think you’ve gotten really good at translating, uh, some of the technical or research side in a way that real humans can understand. And I think that’s part of our goal with talking together today is to do some of that.
00:03:05 JK Yeah sure! Sounds great!
00:03:06 MH Okay so let’s start back with how you got into this industry. You have a really interesting path or journey and, um, I’d like for you to share some of it with people.
00:03:15 JK Yeah so you know, so very unconventional as you know well. So, the way I like to describe, as you mention, grew up in Tennessee. So, a rural area. I actually grew up on a farm which was a great, great early childhood. And then to adolescence, and basically…
00:03:31 MH And how many people in your town?
00:03:32 JK So we were about 5,000 people total. So, a very, very small-town Tennessee. Yeah. So basically, the way I think about it is, you know, I kinda wandered aimlessly. Did well in high school but had no idea of what I wanted to do. I played a lot of sports, played baseball. And the way I think about it, so I had a couple of knee injuries in high school, and really, it kinds sound of silly today, but I would say I kind of defaulted to physical therapy of all things as a result of going through a couple of knee injuries, rehab. I thought, “Eh, I don’t really know what in the world I want to do. So, I’ll just start down this kind of pre-med physical therapy path”. So that’s really where it all started. So, I went to a really small school in that world. I was kind of headed down that path of physical therapy. I actually got all the way through physical therapy school. So were talking like six years of total school between undergrad and then the actual physical therapy part.
00:04:34 JK And long story short was basically faced with a decision, you know, I had, what I think of were two really good choices. I could either stay in that physical therapy realm and basically like an athletic training kind of physical therapy role. I actually was interviewing, I don’t know if you remember this, for a position at Dr. James Andrews Clinic, which anybody who is into sports will know that he’s one of the noted orthopedic surgeons, I guess, to this day. So, I had that path that I was contemplating going down, which I, I truly think I would have enjoyed. But then, separately, and this is where it starts relating to the investment strategy side. And so, I actually took no classes whatsoever, undergrad or obviously in physical therapy school in finance. And the way it came to be, was I got married in my early 20’s to my wife, Leslie, who you’ve gotten to know well. And neither one us had taken any finance or investing classes. She was a dietician by training. So literally the way this started for me was basically saying, you know, one of the two of us needs to learn something about personal finance. We were living the actual at the time. This was the early, early 2000’s and I got the role of that job. So just, I think went to Barnes and Noble or something of that kind and picked up, I believe two books. One of which somehow happened to be Larry’s first book. The one of his, I forget the long title.
00:06:09 MH The Only Guide to a Winning Investment Strategy You’ll Ever Need which is an unfortunate title for someone who will go onto write many other guides to investing.
00:06:17 JK Yes, yes! Exactly!
00:06:18 MH I think, what is he on? Book 16 now?
00:06:20 JK/MH Something like that.
00:06:22 JK But Larry, to be fair to Larry, he will tell you, as I think generally is the case that he had no control over the title and would have picked probably something different. But, so I happened to pick up that book, I happened to pick up Bogle’s Common Sense on Mutual Funds. Again, I had no clue how I landed on those two, two books. I wish I could remember better the details. But really, that’s where it all started and what was interesting to me was that, as I mentioned, I kind of just meandered into Physical Therapy, as the way I like to think about it. But I did OK in school but was never really passionate about it. And I knew very, very quickly as I started to read these two books, something just clicked. It was very interesting to me and it kinda escalated very, very quickly from there, so.
00:07:14 MH Mm. And so, you read these books, you get turned on and then didn’t you hear Larry give a talk somewhere, or get excited about um, some, some, some element made you change and then ultimately move to St. Louis. What was that?
00:07:31 JK Yeah so, so, the way it started was, so internet was already a big thing. Obviously, we’re talking early 2000’s. Larry, the great guy that he is and still to this day, was very accessible, was participating a lot at that time on the Vanguard Diehards, former Bogleheads Forum, as is known today. So that was how I originally connected with him directly. And so, he and I basically started trading e-mails, and knew that I was passionate, didn’t know where it would go. I’m sure, I mean, this is very early, early days, but knew I was passionate, was very accessible. So yeah, he and I started dialogue over e-mail basically. And I got a chance to go hear him speak at one of our firms on the BAM side in Cape Girardeau. So that was where I got to meet him personally for the first time. And then from there, actually, he was able to allow me to get an interview with the firm. Obviously, much smaller at that point in time and actually in a fixed income role. It’s kind of a little bit comical when you think about it today because literally this is somebody who had no formal training in investing, had a physical therapy master’s degree. So, I was interviewing months out of physical therapy school with Buckingham, for essentially a role in their fixed income group, which was in its early history at that point in time. So that’s really how the process started.
00:08:55 JK And now I actually did not get that job. That job went to someone else. So, I remember my wife and I, Leslie, going back to Nashville at the time thinking, you know, I’m going to have to go get a master’s degree or get an MBA or something really pivot in an educational way formally away from physical therapy. And it happened to be, I think, not more than maybe 3 or 4 months later that they created more of a junior advisory role at Buckingham and Larry, being the persistent guy that he is, helped me get a second interview there. And that’s when I came on board, basically, in ’03 with Buckingham.
00:09:33 MH Yeah, well you certainly made a huge impact. I mean, yeah, you are too humble to say this. But I’ll say it for you. I think if people audited the country and looked for one of the biggest, brightest thinkers who might sometimes be under the radar, you are that guy. I mean, we’ll get into this later, but you, uh, have written a couple of great papers. One, that received recognition as the paper of the year in our industry. And I think if we go, before we jump ahead, if we go back and think about, um, where evidence-based investing or passive investing or indexing, or even if you call it, factor-based investing. If you go start thinking about the movement from old traditional active management to kind of the stuff we believe in… when you were starting your career, how would have described… how would you describe the phase of that evolution back then?
00:10:27 JK Yeah, it’s amazing to me. So, I’m 15 years into this as you are somewhere in that same neighborhood. It is amazing how much things have changed back then. So I think of that as really the inception of the individual investors starting to become more and more aware of an evidence-based approach, which I think of as essentially, there’s a traditional approach to investing, which is basically, “I’m going to hire someone to be able to outperform the market and pick individual stocks”. And that was still prevalent then and is somewhat prevalent today. But if you think of how much the world has changed since that 2002-03 point, it’s changed markedly. I’d say today, the vast majority of people that I talk to individual investors are somewhat familiar with the concepts that we’re talking about and that we’ll go through today. Whereas, when I think back to the early 2000’s, some were, but the vast majority of folks were not nearly that aware of this type of approach. I mean, it’s just been an amazing, amazing change in growth over the last decade and a half.
00:11:29 MH And, from your point of view, what do you think are some of the key forces that have, um, catalyzed the change?
00:11:38 JK Yeah, so I think, you think about people like Larry, you think about people like Bogle, Bill Bernstein, Rick Ferri, ah, these people that were in this world in the 90’s into the 2000’s period. So, I think they’re a huge part of this. I mean, somebody like Bogle, that has got to be at the top of that list in terms of continuing to preach and advocate to individual investors about this type of approach. So, I think there’s that, I think there’s also the academic side of the equation. So if you look at just how much focus there has been on trying to reveal the truths behind investing, how people have actually done in the mutual fund world and elsewhere, I think all those things in tandem basically have gotten to the point where people are just going to be more aware, if they’re paying attention at all in the financial press to what’s ah, what’s going on.
00:12:33 JK Another example that comes to mind is something like the S&P Index versus active score card, which they’ve been doing for a long, long time, but I think people are more and more aware of that particular studies have gotten a lot of attention of what the results shows. So, I think there’s just been a huge, huge community of people that have educated, ah, the US investor based on all these things over, over time.
00:12:59 MH From your perspective, how conclusive, still, even now, is the data on, um, the stock pickers’ ability to beat the average?
00:13:11 JK So I think very conclusive. I think that will always be the case, I think, of Sharp’s Arithmetic of Active Management concept, which basically says it has to be that way, you know, after costs, the typical average actively management strategies is going to underperform the markets. So, I think it’s always been true. I think the only thing that’s changed is just the awareness of that fact and people starting to respond to that. I like to tell people if you go back and look at the history of the research side of this, literally back to the 30’s and 40’s, people were studying this question of, “Do we see that investors, active managers are outperforming traditional market indexes?” And the answer was no. Then it’s no today and it will continue to be. That’s not to say there won’t be managers out there who, over a period of time, do outperform the market, but this fundamental truth of the majority not will always be the case and has always been the case.
00:14:11 MH Okay, good. So, you know, obviously I agree with that and I think that the facts are there. Um, you know for people who make money, inherit money, sell a business, they have money somehow that they don’t need for living. And they know that if they put it under the mattress, they’ll lose purchasing power every day that goes by. Investing in public equities or the stock market, still feels like the best way to protect your purchasing power.
00:14:40 JK Right.
00:14:41 MH And we’re saying that indexing or owning the market is better than the traditional, old school active manager, stock-picker strategy. But we do something that’s a little bit fancier than that. How would you characterize the difference between what we do in our professional lives versus just plain old vanilla indexing?
00:15:02 JK Yeah, so the, the best categorization of this that I’ve come up with is to think about there are three categories of investment philosophies that I think are digestible that actually mean something at this point because I’m definitely in the camp that says that passive versus active, uh, distinction has gotten a little bit muddled at this point and doesn’t mean as much as you would want it to mean. So, I think of, just basically traditional market cap weighted indexing. Which I think of that as like a couch potato approach. I’m gonna go out and gonna buy total market indexes, maybe US, international, emerging, fixed income and just going to call it a day and know that over time that’s a very good portfolio. There’s no disputing that. That’s, that’s the basis of everything that we do, that that type of approach has beaten the vast majority of active investors and what will continue to do.
00:15:56 Then the second category that I think is pretty easy to understand what it means is the traditional approach to investing which we would call active investing in a conversation that you and I would be having. Which basically says, again, I’m going to be able to identify somebody that has personal knowledge or a team of people that are going to be able to outperform that couch potato total market type of approach.
And then category three, for me, is what I think of as evidence-based investing. Which means I’m going to take the indexing concepts which are great, but also be aware of what the academic research says about particular systematic ways to potentially do better than broad market indexes. So in our world as you know that would be things like, there’s a lot of evidence that value stocks as a group over time outperform growth, so you can apply the concepts, keep all the great stuff with peer market cap weighted indexing, low cost tax efficiency and then think about, “Do I want to pay more attention to what some of the academic and practitioner evidence shows about particular asset classes that I might want to overweight in some type of systematic way”. Now I think people can get confused, understandably, well is that not active? We don’t think of it as active, obviously. Its rules based; it’s based upon academic research. It’s not based upon proprietary research. These are things that are well known at this point, but with that said, it is different from the kind of the total market type of approach.
00:17:27 So I think, to me, those are the three categories that I think if you take some time, most people can understand, “Okay, these are three different things and to me are a better scheme than the active and passive kind of way of divvying things up.
00:17:42 MH Yeah. Good. I like that categorization. What about, you know, for people who say, “Jared, yeah, I… the simplicity of this, just me buying these index funds and keeping everything really cheap, appeals to me. I don’t know if it’s worth it to sort of tilt myself towards these things that academic research has found MIGHT show up. They don’t always show up.”
00:18:08 JK Right.
00:18:09 MH (Sigh) I think that if it can just keep my costs low, um, it might be easier for me. How do you respond to that kind of thinking?
00:18:19 JK Completely understandable and there’s nothing wrong with that. Like as we both know, there’s some folks, where that is the right approach. Certainly, we’ve got clients that are doing that, that have looked at that. They are either skeptical of the evidence or skeptical of their ability to stick with something that will underperform the market from time to time, as we’ve seen with value. So, I’d say, in a way we would say an active approach doesn’t make sense, right? Like we would never recommend that for a client. There could be certain situations where that’s perfectly the right way to go. But, to me, if you are willing to look a little bit different from the market, I think, over time, you’ll likely will have a better, you know, approach, a total market approach, but you’ve gotta be able to stick with that over time. And that’s key because any of these things that we would put in that evidence-based investing category by definition, do look a lot different from the market as most people think about it. Sometimes, that’s going to be for the good. Other times, that’s going to be to the detriment in terms of underperforming for a period of time. So that’s an important question to think through. And I would say again, nothing necessarily wrong with that approach for some investors.
00:19:33 MH Okay, you know it’s interesting when people sometimes think about index investing, they think about Vanguard and they think about Jack Bogle. But Vanguard actually has active funds.
00:19:43 JK Right.
00:19:44 MH And you really, I think, upped your street cred when you wrote a response to a paper back, I don’t know how many years ago. I think that was…
00:19:53 JK Over 10 years for sure. Yeah.
00:19:56 MH So can you in sort of simple terms describe what your paper was saying or what the original paper was saying, what your response was saying, and what that whole conversation meant.
00:20:09 JK Yeah, so the original paper was basically comparing the performance of Vanguards actively managed funds to their index funds. And basically saying, “Hey look! These active funds as a group have outperformed”. So that’s pretty interesting, right? So maybe active is okay. I just need to do it through low costs, kind of Vanguard-type of approach. And I would say if you’re gonna do it, that’s probably a better way than any way. I wouldn’t recommend it, but it is understandable from a cost perspective. But what I found was that if you looked at their active funds as a group, they were basically tilted, in our lingo, towards some of these evidence-based investing concepts that we’ve already touched on, like value investing. So if you looked at their out performance relative to Vanguards indexes, which is primarily at that point in time S&P 500, the out performance wasn’t because they were great stock pickers, the best I could tell, it was because they were taking advantage of some of these concepts, like tilting in the direction of value stocks and that was generating the out performance. So, to me, it wasn’t really an active versus passive, again, it was more of an evidence-based approach that looks like it’s an active wrapper, essentially compared to kind of a total market approach. And that is what explained that historical out performance.
00:21:27 MH Hmm. Yeah. Great. Ah, okay, but before we talk about your, your other paper that won the big award, let’s talk about a few other things. Let’s lighten it up for a second. Um, if I talk to your mom, and I said, “What are the… how would you describe Jared? What are the three words she would use to describe you?
00:21:47 JK Yeah, so, I think a good son, I think a good father as well, so we’ve had obviously a great, great relationship. So, I think that those are the two things that would come to mind. I think she’d also say very passionate about what I do, although, as you know, we went through a period there as you could imagine as a parent, where you’re pivoting from something that a lot of money has gone into physical therapy into a completely different direction in your early 20’s. So, I know she and my dad were both perplexed for a period of time there. But I think they now have come to realize how passionate I am about what I ah, what I do.
00:22:24 MH Oh yeah, yeah. Okay good. Um, what do you think Larry Swedroe would say if he were here and I said describe Jared in three words?
00:22:31 JK So I think he’d still say passionate for sure. Passionate about what I uh, what I do. Very focused on trying to help the individual investor and if I had to come up with a third thing, I’d say focused on very good at communicating concepts to individual investors and advisors on the investment strategy side.
00:22:52 MH Yeah, Larry, I mean, we should say, The Only Guide to a Winning Investment Strategy You’ll Ever Need, his original book, that changed my life and sounds like it had a huge impact on you too. And I know there are lots of other people, uh, who, at least for me, the first 100 pages of that book changed my thinking.
00:23:08 JK Right, right. Well if you think about it, I mean, we’re talking mid-90’s. So again, that, that was fairly early on. I mean if you think about the state of what was going on investment strategy wise in the mid-90’s, yes Bogle was already out in front. [inaudible], some other folks. But if you think about people in the advisory world, registered independent advisory world, Larry was very, very early on there. And yeah that book as had an amazing impact, both clients that we talk to, people that we know that are in this business including you and me for sure.
00:23:44 MH Yeah. I feel like Larry would say, “Euge” for “Huge”. He’s a New Yorker, I can’t do it. Um, okay, so, we both really like sports and like sports analogies. Let’s talk for a second, I mean, a lot of people in our community have compared this sort of revolution or evolution that’s happening in investing with the changes that you can see, really in baseball, but I think across other sports now too.
00:24:13 JK For sure.
00:23:14 MH Where data and evidence are a part of how big decisions get made versus the old, sort of, natural human instincts and intuition. Um, and I know there’s at a lot of great companies and organizations and sports teams, there’s kind of a hybrid now. Like, don’t forget the human piece, let’s incorporate it, or overlay the data into what we sort of know to be true, instinctively. So how would you… how do you think about those changes in sports and how they compare to what’s been happening in our world?
00:24:50 JK So very similar in some ways. As you mentioned, it has, like I’m a huge NBA fan. So, if you look at kind of to me, that was the second wave after what we saw in baseball. Analytics just have taken over basketball at this point like they have a lot of other sports. So, I think it’s a great analogy. I think it really starts, yet if we wanted to have an analogy to the investing world, to me, it’s about, kind of, individual opinions, kind of gut feel versus what the data actually shows. That’s kind of where Moneyball started basically. At a high level, I think that’s where what we’re talking about started to get a lot of this came out of what people thought was the case. Meaning, we think most investors are outperforming the markets to know that’s not really the case. Here are the drivers that matter, and that really came out of the academic world, which is a quantitative field at this point, as far as finance goes.
00:25:49 So, I think there are very, very good similarities, kind of analogy, there. Data and evidence versus people’s individual opinions that sometimes are right but a lot of times we’re wrong. Again, the conventional wisdom was clearly wrong in this case. If you wanted to think of the Moneyball analogy, it would be what we think all that matters is batting average. But no, what really matters is stay on base percentage. So, there was a misperception. So I think it’s a good analogy.
00:26:18 I think the other thing though that’s a little bit underrate that jumps to mind when I think about the Moneyball thing and what’s happening in the NBA, to some degree, the people that are best, or front-runners to me, are some of the best “active” managers. They are the people that figure out, you know, this is something that’s mispriced in the marketplace and I think the other analogy that you draw is how quickly those things go away. Like, we don’t, you know the Oakland A’s didn’t continue to be the only ones who knew about A, B, C or D on base percentage. So, anything in the market that’s an inefficiency or something that, that can be found that’s going to work a little bit better you see in the sports world great examples of how quickly people adjust to that. Again, the NBA example would be, you know, people figured out, you know, I don’t need to be shooting long 2’s. I need to be shooting more 3’s and shots close to the basket. It didn’t take long for the entire league to realize that, you know, that is right. That’s what the data shows and they adapted to that and now that’s, that’s no longer like secret sauce, if you want to think about it that way.
00:27:28 So I think that’s another piece that comes to mind there. It’s a great example of how quickly smart people… because again a lot of the people on the active side of the equation, the claim is not that their all idiots, you know, some of those people are very talented and smart people. But it shows you how quickly markets adapt to things and things that, that may work, that no longer work.
00:27:50 MH Mm. Yeah, I don’t pay as much attention to basketball, but I think what you’re saying is clear. The game is changing and there’s a clear understanding of what works.
00:28:00 JK Right.
00:28:01 MH You know just like you were saying about in baseball, a scout goes to a game and sees somebody strike out and they write in the report their assessment of the player and I love the scene in Moneyball where they say, “Oh he’s handsome! He’s a big handsome guy. I really like the way that guy looks. And boy, um, he would be a great addition to our team”, based on, you know, that sort of one small sample size-
00:28:22 JK Exactly
00:28:23 MH uh, experience and it was hard to digest this sort of bigger picture, understand the bigger picture. And I think getting clear about what’s really working and what isn’t and sort of removing some of those biases, um, has been the big change. I mean, it excites me because I feel like you get closer to the truth.
00:28:42 JK Right. Right. Exactly, and it’s also one of those things that investing and finance, you know, a lot of the academic world gets a lot of critiques from certain channels about not knowing, you know, being ivory tower folks. But I think if you have a balance view of our world, you have to say that a lot of this, they were, they were way ahead of the curve. A lot of these folks like, Professor Fama, and people going back further than that. I mean, these were again from the Moneyball analogy. These were the Billy Beane’s of the world decades in advance of people actually understanding what they had really found. So I think as much as you can say about Larry, Bogle, lots of other people on the practitioner side, there’s a huge component in our world that is coming from that academic world and my sense of where it really started were some of the really ground breaking initial wok was done.
00:29:39 MH How is your thinking about investing changed over your career, if at all?
00:29:45 JK Um, so it has, it’s pretty similar I would say to today compared to what it was before. I would say if you’re in this business in any capacity for long enough, you do develop a certain skepticism over, over time. I mean, I was naturally skeptical in the truest sense best meaning of the word in terms of what the active data and evidence showed versus more of an evidence-based approach. But if you’re in this business long enough, you do develop a healthy sense of skepticism of almost anything. So that’s one thing I would say and I think about my growth over the last 15 years in terms of how you evaluate different things that you see, how you think about different things that you see that are even within the realm of evidence-based and investing in terms of, “is this something that I should really be thinking about pursuing or that could make sense inside of someone’s portfolio. That, even in our world, that’s not the easiest task because there’s a lot out there. I think that’s one of the biggest challenges that I face day to day. One of the biggest changes that I’ve seen, is just how many fund companies, for example, are in this world purporting to do, whatever it is they’re doing that is somehow fitting or supposedly fitting within the framework of an evidence-based approach to investing. So, kind of digging through all of that and understand, okay, what of this is actually credible versus not, is not an easy task at this point.
00:31:15 MH Yeah, you know, I, this… I don’t know what you think about this comparison, but sometimes I think about in with respect to healthymn eating, I felt like everybody tried to slap an organic label on their food product when healthy eating or organic labeling seemed to become the thing or the popular sort of way to sell your or market your strategy. And I feel like it is, it is even now more difficult than ever because so many people are saying, “Yes! Oh we have an evidence-based approach. We do the same kind of thing those people do”.
00:31:45 JK Right. Yeah, I think you see that both in our world on the advisory side and on the fund company side. So, on the advisory side, one thing that’s absolutely more prevalent, people just reacting to market forces is to say, “yeah, here’s what we would normally do, but oh yeah, if you want that, we can do that as well”. That meaning like a passive or evidence-based approach. So, you see a lot more of that. People pivoting on the advisory side to say, “well yeah, if that’s what you want, we can do that as well”. But you also see that on the fund company side when I think about the mutual fund world. Yeah, almost every firm of any kind of size is saying that they’re doing something in this realm under various labels like Smart Beta or factor investing or evidence-based investing. So, you’ve had a lot of parodying of this concept some of which is legitimate, like obviously there are going to be new people in the business that do have something interesting and credible but sorting through that is definitely a big challenge as I said before because there’s been such an explosion on every side of the business of people trying to be in this world of evidence-based investing or index-based investing.
00:33:02 MH So, as you talk with investors or prospective clients of your firm, what the big mistake or misconception you think um, a lot of people have or make?
00:33:18 JK Yeah, so this was an easy one for me and it’s maybe influenced a little bit by the last 3-5 years we’ve seen performance related questions like related to value investing, for example. So, I think the single biggest thing that I see even people that know this approach, well like, I’m even talking about people on the advisory side is not understanding how long of a period of time the unexpected can happen. So, an example would be we expect, right, as you said, the w to outperform, stock market to outperform a safe fixed income bond approach, for example, everybody I think agrees at that point. Yeah. Over time that’s what I expect to happen. But, it isn’t so reliable to rule out the possibility of that not happening for a 20 year period. For example, we’ve seen multiple 20-
00:34:10 MH 20 years Jared! Come on! Now that’s a long time!
00:34:13 JK And that’s the-
00:34:14 MH You want me to sit still for 20 years? Are you crazy?
00:34:15 JK It’s possible. It’s absolutely, absolutely possible! And I think that’s the value of the advisory side of the business a value we can bring if we know these types of things. But I think people, with investing, they say, “Oh this is a very great approach”, and it very well could be low cost, very tax efficient, evidence-based or index-based approach. You’ve got all those things nailed down. That doesn’t mean that it’s guaranteed to work at a high level. Work meaning generating the returns that you expected to generate even over really ,really long periods of time and I think that is still both within the practitioner side and certainly within the individual investor side. One of the most misunderstood concepts because to your point, people think of the day and age that we live in with the information flow, the knowledge that we have about different things, people think of 3 years as an eternity. Five years as an eternity, 10, 20 for certain. That could be one-fourth of someone’s life or more.
00:35:18 But in investing, unfortunately, I wish it were different, but unfortunately, that’s just the way markets work. So even if you’ve got a well, well thought out strategy, if you’re going to be tempted into re-evaluating and changing that approach based upon 3 years of performance, which is laughable, 5, even 10, which is what you see continuously in the institutional community, it’s just nonsense. I mean, the unexpected can happen, and that tell you nothing about what’s going to happen from there even though you feel good, that well I’m looking at a long period of time. So, I think that’s one of the, again, we were talking about some of the things that I’ve grown to appreciate more over the last 15 years. That would be another one, just how difficult it is for people that know a lot about this to stick with something after really long periods where it hasn’t done as well as expected or maybe even underperformed expectations by meaningful amount. That’s a really, really difficult thing to do, even for people who know this stuff A to Z from a technical prospective, or at least think they do.
00:36:31 MH Yeah. Great answer. Um, this is maybe where I think our investment philosophy or thinking affects life also because I would say, just what you said, um, I always think about this expression, “embrace uncertainty”. You know in many ways, we get paid or rewarded for embracing uncertainty and things can be uncertain for a long time.
00:36:56 JK Right.
00:36:57 MH And yet we know over long periods of time, the math looks really good. Like we don’t do anything that isn’t supported by academic evidence, and yet it’s going to require patience and discipline.
00:37:09 JK Yeah.
00:37:10 MH And those two qualities aren’t always a human’s sort of best spot.
00:37:15 JK Right. Another way I think about it is like the concepts that were talking about, the thing that we know about them again, low cost, tax efficiency, pursuing this evidence-based approach, being globally diversified. The thing you do know for certain is that is if you stick with that, that’s going to produce a better result than the vast majority of investors. That’s just a math of the way markets work. So that part we know. The part that people struggle with again, is it may be expected to generate a return of 8% and it does 3 over an extended period of time. Still, you are better than the vast majority of investors because of the other principles, but you failed to meet what everybody thought was going to happen with this particular approach. That’s the part that I think will never be solved in investing. The challenge that that present even if you’ve got all the other pieces in place and thought about correctly.
00:38:15 MH Okay, so this may be tricky, but you wrote this paper that won an award for best paper of the year. Which journal was that?
00:38:25 JK So Journal Portfolio Management.
00:38:27 MH And can you explain how, what was it about that paper that was so special? What was the main point and what’s the takeaway for the public or for advisors?
00:38:40 JK Yeah, so a pretty technical piece. It’s so hard to dig through it but I think if I were trying to say practically, you know, why it got quite a bit of attention and did well and it was a paper I co-authored with Antti Ilmanen from AQR, so great experience there. So I think the main thing that it said, so coming out of the financial crisis of ’07, ’08, early ’09, one of the things that was very, very obvious was that there were very few things that provided diversification to the equity market during that period of time. There were a lot of things people were invested in that they thought were going to provide some offset to what equity markets did and the reality was, there was hardly anything it did other than high quality fixed income.
00:39:27 MH So when it hit the fan, it all hits the fan. So, it’s everything-
00:39:30 JK International equities were down and merging, US stock… basically everything even supposedly high-quality fixed income, corporates, high yield, were down massively. So yeah, that’s a great way to put it. So, what we had looked at were basically some of these concepts, these factors, or styles that you can tilt toward, as we keep saying, like value. A momentum is one that we haven’t mentioned. Those styles, how did they do during that period of time and how had they done over longer periods of time. And what we found was, as everybody knew already, this was nothing new part of the paper, they had done well over that longer period of time, but we also found they held up pretty well during the 2007, 2008, 2009 period which was interesting because it suggests, you know, there are other things that you can do besides high quality fixed income treasury bonds, for example, that seemed also to hold up well and kind of refute this notion that everything fails when things get really, really bad. Yes, mostly that’s true, absolutely. But it looks like there are a few areas, not only treasury bonds that have held up pretty well, even in a period like that. So, I think that was a really kind of interesting aspect of that piece.
00:40:53 MH Is there anyone you know that has successfully been able to time the market? People always say things like, “couldn’t you see this coming? Is there anyone who can see the next thing coming?”
00:41:07 JK Very, I would say there is probably is someone I think identifying them in advance is almost impossible. Um, and the other thing that we know is that people can be right once, but may be wrong many, many times after that. Rubini is an example that Larry Swedroe likes to bring up there somebody who appears to have predicted the ’07, ’08, ’09 crash but certainly was not right in predicting how quickly things would bounce back and whether it would get worse. So that’s a problem that you have. I think the only thing that I would say there that’s maybe new and interesting to talk about. There are probably are some quant firms that very few people have access to and this is part practically it’s not that meaningful for an individual investor that may have models that work reliably well, but all the evidence seems to suggest they’re generally closed to all investors running their own capital because why wouldn’t you if you, if you literally know ways to time markets or stock-pick reliably. You can run your own personal money and family money and that’s probably all that you ever need to worry about.
00:42:20 So I think the short answer is for the practical investor community that is something that investors should generally avoid because it’s going to be more problematic than any value that you’re going to get out of it particularly once you account for having to be right twice. You know, having to figure out when to be out and then having to figure out when to get back in. It’s a very, very difficult thing to do.
00:42:43 MH You deal with institutional investors and also individuals. How are those two audiences different? Do they make decisions in the same way or are they radically different?
00:42:54 JK So I would say radically different again if I think about something that I’ve learned now that I had no clue about in the early 2000’s when I started. I think that the perception broadly is that, right, institutional investors, these are smart people, the committees are made up of smart people so they have to be better from a decision-making perspective than your proto-typical individual investor. I’m not at all convinced that’s true. I think that’s absolutely true for some institutions that have really thought through the governance of their committees, imbedding a philosophy that they’re going to try and stick with from a longer term prospective as opposed to that being specific to that particular committee.
00:43:46 But as a general statement, I’m in the camp that thinks that in general, there are a lot of individual investors who are better behaved, if for no other reason than they know what they don’t know. You know, there’s some humility there and in the institutional community, it’s very, very easy to fall into this trap that well we are smart people, so we’re going to know what we need to do, or we’re going to have turnover on the committee and now we’re changing to something completely different philosophy or falling into that trap of thinking, well we’ve got a lot of different data that we’re looking at here, we need to make A, B and C changes to the portfolio. So I think in a lot of ways, the institutional investor community, if I said broadly, has a lot of ground to make up in terms of in some ways is I think behind some of the innovation that we’ve seen in the individual investor world has struggled more.
00:44:28 With a great example also jumps to mind as a lot of people have tried to replicate like the Yale model of investing, you know. Which Yale no doubt has had very sizable returns it appears over time relative to what broad markets have provided now. They’ve taken a likely more liquidity risk and other risks. So there’s some debate there, but I think I’m comfortable saying it looks like they’re substantial skill. There was Swenson and the Yale team, but I think again an example of where institutions were not humble enough is thinking, well I can replicate what Yale did, right? And that type of approach and they failed miserably if you look broadly at institutions that have tried to do what Yale has done. They were not capable of doing that. So I think that’s a trap, one of the traps that institutions fall into that an individual investor, most at this day in age, are not thinking about, “oh I’m going to try and replicate what Yale did” and think that they’re actually capable of doing it. There’s a level of humility there from a lot of individual investors that at are sometimes absent from the institutional world.
00:45:35 MH Okay, if you could tell every investor in the US or maybe even beyond to do one thing to positively impact their financial future, what would it be?
00:45:47 JK So I would say to me, some of these simple concepts that we’ve talked about are simple concepts, but as everybody likes to say is true, they’re hard to stick with and stick to. Over time, I think, that is the key to investing. Put, for most people, put these concepts in place. Again, I like to think of it as relatively low cost, relatively tax efficient, broadly diversified at least globally diversified and stick to that framework basically over time, regardless of what results are. And I literally mean regardless because as I said, that does not guarantee you that over a 5 or 10 year period you’ll be happy with the absolute results that you’ve generated. And that’s the problem that people run into. So that’s what I would say. Develop that idea, that plan, as we like to call it and literally almost forget about evaluating how it’s doing over time. Now that’s almost impossible for most people and I think that’s again the value of what we can bring to the table. But I think that’s the key. Develop a good plan and essentially ignore the absolute level of results that you get from there because they’re not controllable and they can be different than you expected for really, really, really long periods of time.
00:47:06 MH Anything you’re working on or thinking about that we should know about or try to support in the future? Any new writing?
00:47:14 JK So I’ve got a couple of academic-oriented pieces, so I always try to keep one or two of those that I’m working on which is a challenge sometimes of my day to day work routine, but that’s what I really enjoy. When I think about writing, I like writing a little bit more on the technical side and eventually try and translate that into a more practical level. But I’ve got a couple of pieces, one that I hope will ultimately get published, that looks at basically the corporate buying market, which is something we get-
00:47:43 MH [crosstalk] area of fixed income if you want to get people excited, just talk about bonds and people will really gonna get pumped up.
00:47:47 JK Exactly! Exactly! I think I’m up to close to 200 downloads on the SSRN networks. So that’s pretty decent in my world, but not Harry Potter level, right? So, I’ve got a couple of pieces that I’m working on there. One is on a corporate bond side and it is interesting to me, again, I’m obviously atypical as it relates to this stuff, but it’s interesting to me because I think, one, if we go microlevel, I think one of the most misunderstood things broadly about investing is this misperception that, that corporate bonds have rewarded investors relative to treasuries. Like that’s just a fundamental belief that to this day, most people have even in our world, even if you looked at advisory firms in our world, you would see a lot of them own some form of investment great corporate strategy. When in my opinion, the data shows there’s very, very little evidence that there’s been anything at all remotely interesting from a returns prospective about that, that strategy.
00:48:48 So, I’ve got a piece again that I’m excited about that kind of looks at that data there to try and bring out that point. Because I still think that as much as folks know at this point when you look about the fixed income markets specifically, partly because people find it boring, I think there’s a lot of things that people believe about that marketplace, including corporate bonds that you will see in the data just does not support it in any way at all. And the reason basically, we continue to advocate for basically the fixed income, just keep it simple, super high quality and all this stuff that seems interesting on the face of it, in general doesn’t appear to be when you look at it at a more micro and kind of deeper level.
00:49:31 MH Yeah, I know we both subscribe to the same way of thinking, but, uh, fixed income is there to help you sleep well and equities are there to help you eat well.
00:49:40 JK Right
00:49:41 MH And, um, so that’s still the same old story. And the minute people try to get too jazzy in fixed income, usually bad things happen.
00:49:50 JK Right, and the only, only window that I would leave open there, there may well be some things that are fixed income like that truly are interesting, but almost all those things you should put in some other bucket and classify them as alternatives. Don’t think of them as fixed income in any fundamental way in terms of providing diversification to equities or whatever. You’re safer if you go down that path, at least mentally, to think about them as a completely distinct, they’re not equities, they’re not fixed income, they’re some other thing that you’re targeting in the portfolio so you don’t get tricked into believing, “Oh, these are just like the high quality fixed income strategies that I, that I own.
00:50:32 MH Well thank you so much for spending time talking with me. I love chatting with you. Um, where can people learn more about you or follow you?
00:50:41 JK So as you mentioned on the bio side, so Multifactor World. So, I do blog there, I would say periodically, not as much as I would like to. I’m probably at this point most active on LinkedIn, I like to do a lot of posting of graphics, kind of GIF’s to kind of illustrate some of these concepts because a lot of times there are things there just to LinkedIn kind of super, super micro blogging format. It’s just more efficient for me to get out. So pretty much anything that I’m doing, either kind of microlevel or anything, papers that I’m working on, that’s kind of the main way. That and the blog side that kind of content gets out at this point.
00:51:19 MH Awesome. Well, you’re a great human. You have a gigantic brain. And you’re doing good work in the world. And I know, um, I’m so glad that however you stumbled into the bookstore and found Larry’s book and Bogle’s book and it led to your journey where our paths crossed. I’m grateful. So, thanks a lot Jared.
00:51:40 JK Yeah. Same here. Thanks man!
00:51:41 MH And, if you want to know more about Hill Investment Group, check out Takethelongview.com and thanks for listening to Take the Long View with Matt Hall. We’ll catch you next time!
00:51:49